Margins matter. The more Cummins (NYSE: CMI) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Cummins' competitive position could be.

Here's the current margin snapshot for Cummins and some of its sector and industry peers, and direct competitors.


TTM Gross Margin

TTM Operating Margin

TTM Net Margin





 Danaher (NYSE: DHR)




 Emerson Electric (NYSE: EMR)




 Oshkosh (NYSE: OSK)




 Dover (NYSE: DOV)




Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that chart doesn't tell us much about where Cummins has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Cummins over the past few years.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 21.7% and averaged 20.5%. Operating margin peaked at 8.7% and averaged 7.2%. Net margin peaked at 6.3% and averaged 5.3%.
  • Fiscal 2009 gross margin was 20.1%, 40 basis points worse than the five-year average. Fiscal 2009 operating margin was 5.2%, 200 basis points worse than the five-year average. Fiscal 2009 net margin was 4.0%, 130 basis points worse than the five-year average.
  • TTM gross margin is 22.6%, 210 basis points better than the five-year average. TTM operating margin is 7.7%, 50 basis points better than the five-year average. TTM net margin is 6.5%, 120 basis points better than the five-year average.
  • LFQ gross margin is 23.5%, 510 basis points better than the prior year quarter. LFQ operating margin is 9.3%, 600 basis points better than the prior year quarter. LFQ net margin is 7.7%, 540 basis points better than the prior year quarter.

With recent 12-month-period operating margins below historical averages, Cummins has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the home run stock you're too afraid to buy.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Emerson Electric is a Motley Fool Income Investor selection. 

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